Gross Adds to Treasuries Holdings After TIPS Losing Bet

By Susanne Walker -
Jul 16, 2013

Pacific Investment Management Co.’s
Bill Gross added to holdings of Treasuries in his flagship fund
in June while betting incorrectly on gains in U.S. inflation-indexed securities during the first half of the year.

The proportion of U.S. government debt in the $268 billion
Total Return Fund rose to 38 percent, from 37 percent in May,
according to data on Pimco’s website. The Newport Beach,
California-based company doesn’t comment directly on monthly
changes in holdings or specific types of securities within a
market sector, such as the percentage of Treasury Inflation
Protected Securities in the U.S. grouping.

Gross had been buying TIPS on a bet that money printing by
the world’s central banks would push up consumer prices, making
Treasuries the largest portion of the fund. When yields began to
rise in May on expectations the Federal Reserve would slow its
bond-buying program, inflation expectations didn’t, amplifying
the losses on inflation-hedged U.S. debt. The world’s largest
mutual fund fell 4.7 percent in May and June, prompting $9.9
billion in withdrawals last month, the most on record.

While the yield on 10-year Treasuries soared as high as
2.75 percent on July 8, from a low of 1.61 percent on May 1,
yields on inflation-indexed debt climbed even faster and
further. As a result, the narrowing in the difference between
yields of Treasuries and TIPS, known as the break-even rate,
showed that investors viewed inflation as less of a threat in
the short term and thus were cutting the price they would pay
for insurance against it.

Mortgage Bonds

The break-even rate on the 10-year bonds dropped to 1.81
percent on June 24, the lowest since October 2011. The rate was
2.08 today, while the yield on the 10-year Treasury note was
little changed at 2.53 percent. The 10-year yield will fall to
2.49 percent by the end of the third quarter before ending the
year at 2.61 percent, according to Bloomberg surveys of banks
and securities companies, with the most recent predictions given
the heaviest weightings.

Gross, co-founder and co-chief investment officer at Pimco,
also added to holdings of mortgage securities, the fund’s second
largest holdings. The proportion rose to 36 percent last month,
from 34 percent in May.

He cut non-U.S. developed nations’ debt to 5 percent, from
7 percent in May. Investment-grade credit holdings were
unchanged at 6 percent in June.

Banks Questioned

Over the past five years, the Total Return Fund has
returned 7.2 percent, outperforming about 91 percent of
competitors. It gained 0.15 percent over the past year, placing
it in the 66 percentile of its category, according to data
compiled by Bloomberg.

The Total Return Fund’s government and Treasury debt
category includes fund holdings of U.S. Treasury notes, bonds,
futures and inflation-protected securities.